Saturday, June 17, 2000

Diversity and liquidity / Deposits booming

Investors taking to unit investment trusts

By Amy Higgins
The Cincinnati Enquirer

        Mutual funds have their place. So do stocks and pensions.

        And Henry Dolive had them all — but they alone perhaps wouldn't have allowed him to retire in seven years as comfortably as he wanted to. What he had and where he had it was a bit too conservative.

(Michael Snyder photo)
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        “I was looking for a little more risk and way of diversifying,” said Mr. Dolive, administrator of Anderson Township.

        He chose unit investment trusts, also called UITs. He's not alone: The amount of new deposits in UITs increased 10-fold from 1990 to 1999, from $7.5 million to $75.3 million.

        UITs are like mutual funds in that they pool money to buy other securities. They tend to be focused and stick to a theme, such as tracking an industry sector or an index. Unlike a mutual fund, the portfolios are fixed, often leading to lower costs.

        Unit investment trusts are not a new idea, dating at least to 1940, but they have enjoyed a new popularity in the last several years. The Investment Company Institute says that there were 10,418 trusts at the end of 1999 — about the same amount of mutual funds, but not as well known or publicized.

        “Frankly, I didn't know what UIT was,” Mr. Dolive said. Once his investment adviser explained, however, he said he was excited, but a little apprehensive.

        Larry Kocisko, Mr. Dolive's investment adviser at Fifth Third Securities, said he suggested unit investment trusts based on stocks, particularly a new one from Fifth Third based on stocks of financial services companies.

        Exemplifying this explosion, its financial services UIT is Fifth Third's third unit investment trust in less than two years. A fourth is scheduled to roll out this fall.

        Fifth Third Securities vice president Tom Terry said that the firm jumped on the UIT bandwagon in 1998 in order to develop a product that was easier and more cost-effective for it and its customers.

        That type of equity-based trust is where the real explosion is happening: In 1990, 4 percent of the assets held in all unit investment trusts were in stocks, compared with 87 percent in tax-free bonds. In 1999, 68 percent was in stocks and 27 percent was in tax-free bonds.

        And that's not just because of a raging bull market. During the same time frame, the amount of new deposits to equity UITs boomed from 6 percent of the total UIT inflow to more than 98 percent of it.

        Equity UITs wildfire of popularity was likely sparked by one formed in the early 1990s, “The Dogs of the Dow.” Also called Select 10, this UIT bought and held the 10 highest-yielding stocks of the Dow Jones Industrial Average. Until then, most UITs had been based on bonds.

        “The idea was that in those days, municipal securities were not the easiest to do” for individuals, said Bob Holley, senior vice president and director of unit investment trusts at PaineWebber in Weehawken, N.J. “But they were put in a package that people would know, with a steady and convenient income.”

    A unit investment trust (UIT) is a registered investment company that buys and holds a relatively fixed portfolio of stocks, bonds or other securities.
    “Units” in the trust are sold to investors (unitholders) who receive a share of principal and interest or dividends.
    Unit investment trusts have a stated date for termination. Many UITs are comprised of long-term bonds, and therefore may remain outstanding for 20 or 30 years.
    UITs that invest in stocks may seek to capture capital appreciation over a period of a year or a few years. When these trusts are dissolved, proceeds from the securities are paid to unitholders.
    Some features of UITs:
    • Securities professionally selected to meet a stated investment objective or category. Holdings are routinely monitored, but not actively managed.
    • Diversification within a sector, but often sector-specific.
    • A fixed portfolio, lowering costs and fees.
    • Usually bought through broker-dealers through initial offerings or a secondary market.
    • Required redemption of units at net asset value upon request.
    • Automatic reinvestment of dividends and distributions upon request.
        Many equity-based trusts are the so-called Spiders or Qubes, trusts that hold the same stocks as popular Standard & Poor's 500 or Nasdaq 100 indexes. Unlike most UITs, those trade on the American Stock Exchange and can be bought through any broker.

        But the vast majority are trusts springing up among brokers and investment companies looking to hand their clients the next big wave.

        “I do a lot of UITs,” Fifth Third's Mr. Kocisko said. “It allows me as a broker to point a hot sector versus a mutual fund.”

        Each of Fifth Third's UITs are sector-based: Two on communications and technology, its most on recent financial services, and the upcoming one on health care.

        Mutual funds still have their place in well-rounded portfolios, Mr. Kocisko said, especially if an investor is putting a set amount in it periodically (a practice called dollar-cost averaging). He would not recommend only buying UITs. Mr. Dolive has about one-third of his portfolio in them.

        But for someone looking for quick return, willing to bear the extra risk, and seeking the diversity and liquidity — UITs are one solution.

        “To me, it was more attractive,” Mr. Dolive said. “I looked at it within the context of trying to further diversify my portfolio by adding a dimension that was not there before.”


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